Crude ends higher after volatile week

BP Prudhoe Bay shutdown and foiled airline plot dominated trading

By

MarkCotton

NEW YORK (MarketWatch) -- Oil prices ended higher Friday, capping a roller-coaster week for the market that included a disruption of crude deliveries out of BP's Prudhoe Bay oilfield, a foiled bomb plot targeting U.S-bound planes, and data showing a decline in inventories for all petroleum products.

The conflict in the Middle East, Iran's defiant stance over its nuclear enrichment program and fresh kidnappings of foreign oil workers in Nigeria contributed to the volatility.

"This week had a lot to deal with yet in the end the sell-off was overdone... but so was the rally" said Phil Flynn, senior market analyst and vice president at Alaron Trading, referring to the gains logged on news of BP's pipeline shutdown in Alaska, and the more than 3% decline on Thursday on the thwarted airline plot.

Crude for September delivery added 35 cents to end at $74.35 a barrel. The contract fell just 0.5% on the week after climbing more than 3% on Monday on the Prudhoe Bay news, and then falling more than 3% on Thursday on the foiled bomb plot.

Gasoline futures rose 7.54 cents to $2.064 a gallon, but the contract tumbled 7.5% on the week.

Foiled bomb plot fallout for jet fuel

The impact of the foiled airplane-bombing plot on jet-fuel demand could last quite a long time, according to UBS analyst Jon Rigby.

"At least half of the United Kingdom's 400,000 barrels per day jet fuel demand was cut on Thursday," said Rigby. "Add in big delays at airports everywhere and there is likely to be a swift and significant negative impact on jet fuel markets."

Rigby noted that in the nearly five years since the Sept. 11, 2001, terrorist attacks, "Atlantic Basin jet fuel demand has barely recovered." Prior to the attacks on the World Trade Center and the Pentagon, jet fuel demand was growing, on average, at a 3.7% annual rate.

The Bank of England, meanwhile, froze the financial assets and released the names of 19 out of the 24 people held in custody on suspicion of being involved in the terror plot to blow up several U.S.-bound planes.

Separately, the U.S. advised its citizens in India to adopt a low profile as it warned of possible terror attacks there as the country prepares for its Independence Day celebrations on Aug. 15, the BBC reported.

Progress on draft United Nations resolution

Meanwhile, diplomatic efforts to secure a cease-fire in the conflict between Israel and Lebanon and the militant group Hezbollah intensified. UK Foreign Secretary Margaret Beckett said the U.S. and France have agreed on the wording of a draft resolution calling for a ceasefire between Israel and Lebanese militant group Hezbollah, the BBC reported.

Israel, meanwhile, continues to bomb Hezbollah positions in southern Lebanon as Hezbollah rockets again rained down on northern Israel.

BP hopes for oil deliveries out of Prudhoe Bay

In one key piece of news of interest for consumers and traders alike, the latest assessment from BP executives over the likelihood of maintaining crude deliveries out of its Prudhoe Bay operations in Alaska is likely to ease some supply concerns in the market.

Company officials said late Thursday that it might be able to keep oil flowing from the west side of the Prudhoe Bay oilfield, the Associated Press reported. BP
BP, -0.55%
shut down the eastern portion of the field after discovering an oil spill and corrosion in a pipeline. The shutdown knocked out some 200,000 barrels per day in output. Alaskan crude is used almost exclusively to serve the needs of customers on the West Coast of the U.S.

Around 140,000 gallons of crude a day are still flowing out of Prudhoe Bay, the AP said, quoting Craig Wiggs, a performance unit leader for BP. The company will make a decision by the end of the weekend on keeping the west side open, which would allow BP to maintain its 140,000-barrel capacity and possibly allow to raise output to 185,000 barrels while it carries out repairs to the corroded transit pipeline on the eastern side, the AP said.

IEA lifts China demand outlook

Looking at demand, the International Energy Agency held to its 2006 demand forecast of 84.8 million barrels of oil a day, with Chinese increases making up for downward data adjustments in the U.S. and relative demand weakness in Europe and Japan.

In the current environment, the Paris-based agency added, crude quality rather than overall output is the issue after the BP outage in Alaska. "For the time being, the market can cope with current outages, but in the light of the many possible threats to output, including the current hurricane season, there is little doubt that the upstream spare capacity cushion remains thin," the IEA said.

More kidnappings in Nigeria

There will be concern about a fresh spate of kidnappings in Nigeria. A Belgian and a Moroccan have reportedly been seized by gunmen on the outskirts of Port Harcourt, according to news reports. The latest abductions come just days after two Norwegians and two Ukrainians were abducted at gunpoint.

Local militants looking to gain more regional control of the Niger Delta's rich oil resources are thought to be behind the kidnappings. They have also engaged in sabotage attacks on installations there that have cut into Nigeria's oil production, pegged at 2.5 million barrels a day, by around 20% to 33%, according to various estimates.

Natural-gas ends lower, but outlook remains bullish

Elsewhere in the energy complex, natural-gas prices fell as traders continued to lock in profits following a run-up sparked by the heat wave last week and the threat of a storm hitting oil and gas installations in the Gulf of Mexico.

Nevertheless, there is every chance natural-gas prices could rebound, and the front-month contract is on course to post a small weekly gain.

"Storage numbers are getting a little bit more bullish," said Mike Guido, head of hedge-fund marketing for commodity sales at Societe Generale. "The reports are coming in with draws against a five-year average of builds. You also have between now and November 1, huge event risk for not only storms but also for more heat."

On Thursday, the Energy Department said natural-gas stocks fell by 12 billion cubic feet for the week ended August 4.

Natural-gas futures ended down 26 cents at $7.269 per million British thermal units. On the week, the contract tacked on 0.3%.

Among other energy products, heating-oil futures rose 1.56 cents to $2.041 a gallon, but finished out the week with a 2.3% decline.

In metals trading, gold futures ended lower on the session, and down 1.8% on the week. The benchmark December contract fell $1.60 to $644.40 an ounce. See Metals Stocks.

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